LETTER OF CREDIT--BANK GUARANTEE

This two terminology looks similar but both are very
different. When one wants to expand the business means beyond the national
boundary or within, one needs assurance from the buyer side that after delivery
of goods or services the payment will receive and this can be done by the bank
only.

In short, both these terms are used while doing business or
transactions with domestic or international companies.

So, both these services are facilitated by the bank but in a
different way as per the need of seller party.

Letter of Credit🏙

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It is used while there is a high level of risk involves in
business.It is used while doing import and export transactions with
international companies.L/C is a written commitment issued by the bank or some
other financial institutions for payment assurance to the seller party from
buyer’s request.In L/C, the seller gets a guarantee of payment from the buyer’s
banks on the due date payment will receive only if the seller meets all the
conditions of deal like timely delivery etc.Banks offer a service like L/C on
the basis of proof provided by the buyer’s party.If the buyer fails to make
payment to the seller, the bank pays on behalf of a buyer and then the bank
will recover it from a buyer anyhow.Banks will charge fees for this type of
facilities.So in short, letter of credit is beneficial when product or service
is delivered and payment is not done.It eliminates the financial risk involved
in the business.

Types of Letter of Credit🎎

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🗼Irrevocable Letter of
Credit:

It is not modified or cancelled without the concern of all
the parties.

🗼Revocable Letter of
Credit:

In it, the issuing bank can revoke or cancel the letter of
credit any time without prior notice to the seller.

🗼Confirmed Irrevocable
Letter of Credit:

In it, the confirming bank gives more assurance to seller
same as issuing bank.

🗼Unconfirmed Irrevocable
Letter of Credit:

In it, an advisory bank from the seller's side performs as
an agent for the issuing bank without any responsibility to the seller.

🗼Revolving Letter of
Credit

This type of letter is used if in case regular transactions
take place and remain valid for a long term without issuing the another letter
of credit.

Bank Guarantee🏙

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🏦 guarantee is a service
by which bank gives a guarantee to the seller on behalf of his client for
assurance of payment.

🏢So, Bank guarantee has
the same function as a letter of credit but with some differences.

🏦 guarantee generally used
in domestic transactions.

🏦 guarantee is beneficial
when contractual obligations are not fulfilled by the other seller party.

🏦 guarantee is used in
infrastructure and real estate projects to reduce risk level.

⤵Letter of Credit V/s 🎎Bank
Gurantee

Basis🎟

⤵Letter of CreditBank Guarantee-DefinitionA letter of
credit is an obligation by the bank to the seller if the criteria met, the bank
will make payment.

🎎In bank guarantee, if the
opposing party doesn’t fulfil contractual obligations the Bank will make
payment.

Boundary🎟

⤵It is used internationally.

🎎It is used domestically.

Protection🎟

⤵It protects both parties but favours exporter.

🎎It also protects both but
favours buyer.

Industry🎟

⤵It is used by merchants.

🎎It is used by real estate
and infrastructure developer.

L/Cs are frequently used in international transactions
compared with bank guarantees. When comparing the two instruments, the market
for bank guarantees is much larger than that for L/Cs.